Every year close to 10% of the American population moves their primary residence. That translates into 32 million people according to U.S. census data from 2018. (Census Bureau, 2019)
Most of these moves (85%) are within the same state and 15% are moves to a different state (Census Bureau, 2019). In fact, I have contributed to these figures, once moving from teaching in California to teaching in Vermont. For employees who have a pension plan through their employer and are moving, the first question they may have is what happens to my pension? The only thing I know is that what I did when I moved was not the right move. The house move was fine, but I also cashed out my California Teachers Pension before heading east. Don’t make the same mistake I did. The taxes… oh, the taxes… and penalties I had to pay!
Pension systems were designed to reward employees with the greatest longevity of employment. The longer you contribute to your pension plan, the more you receive from it. This model is not compatible with the more mobile educator trend of the past two decades. That fact is heightened when you include the financial condition of most state pension systems. When many state pension systems across the country are running at a deficit, you can be pretty sure that states are not going to make those dollars easily portable, if at all. Work for a district for five years and then move to work in another state? You can’t transfer your pension and you have to start all over in the new plan. Move again and start over again? You may have 20 years of teaching, but for each different pension system you’ve contributed to, you may only have five years of service! The payout from a pension for five years of service doesn’t belong in the same conversation about a retirement pension for 20 years of teaching.
Now, I could move from one plan to another and use the money from the first plan to buy back credit time with my new employer, so I didn’t lose ground on pension benefits determined by my years of service. There are, of course, transaction costs, and states may limit the number of buyback years… Any limit to the number of service credits that can be purchased could make it difficult to regain actual years of experience as service credit.
When a non-vested teacher leaves a system, they have the choice to withdraw their pension contributions. That’s what I was told when leaving California. You will likely only be allowed to withdraw your own contributions and some interest, but the employer contribution and most of the interest gained stay with your former employer. Choosing to take your money out of the system can result in you having significantly less money than if you stayed until you were vested. The real kicker is that when you take those withdrawn funds to buy back service credit with your new employer, they require you to pay the costs of contributions plus full interest (most of which your former employer kept!) and in some cases you’ll have to add in contributions that your new employer would have made for you. Good luck making yourself whole in a new pension system with those types of rules! Not an easy – or even feasible – feat for most of us teachers.
What to do?
First, be sure to understand your current pension rules, and if you’re planning a move, be sure to check out the service credit buyback rules for wherever you’re moving to. Better yet, contact a local financial professional with knowledge of your pension system and work with them to develop the best strategy for you to realize a retirement income that truly reflects your years of service.
U.S. Census Bureau (2019, November 1). CPS Historical Migration/Geographic Mobility Tables. Retrieved from Census.gov: https://www.census.gov/data/tables/time-series/demo/geographic-mobility/historic.html